Line of Credits

Line of credits (LOC) come in a few different forms when it comes to business banking. In one version, known as an operating line, it is like an overdraft facility (see below) in that once you go through our account balance you then enter the LOC, which would require that you make a deposit each month equal to the interest that has accumulated on the account as well as any other associated fees.

The other version is a separated account typically tied to a credit card that has similar characteristics to a LOC. And require payments like that of a Credit Card.

LOC typically carry a variable rate of interest. Which means that you will be paying the bank’s prime rate plus a flat rate of interest that they set based on the 5C’s of credit as mentioned above.

Overdraft

A credit facility that typically carries a significantly high rate of interest, and a monthly fee that is charged if used. It is there for the instances that you might go below your balance but will have the funds to cover it soon. Overdrafts must be cleared by the end of the month, as you are not able to operate in them month to month, nor would that be recommended considering the interest rates that normally can be as high as almost 30 percent.

Credit Cards

One of the most popular credit facilities. Credit cards typically carry an interest rate of 20 percent to 25 percent. It is best to get a credit card to help build up your commercial credit, but just like personal credit cards, they should only be used to pay for things, but paid off on time, to avoid interest expenses and other potential downsides. The benefit of credit cards is that they come with additional perks such as cash back or points.

Term loans

Term loans are used for a variety of purposes such as purchasing equipment, paying for leasehold improvements, or even for real estate transactions. A Term loan will have several aspects behind them.

One will be the interest rate, which can be fixed, a specified rate, or variable meaning it fluctuates with the banks’ prime rate. The interest rate is essentially the premium you must pay to receive the loan. They can be closed in that you are restricted to how much you can pay back during the term. Also, the rate may be open in that you can pay back the loan at any time. Open loans, sometimes carry a higher interest rate, that is why a closed option might be more attractive.

Then you have the term, which is the length of time you are locked into paying that loan with the current financial institution. If you want to switch banks during the term, you may be required to pay a penalty. Then there is the Amortization period, which is how long the loan is supposed to be paid back over.

Lease financing

Depending on the size of your business, or your requirements the banks might also be able to provide you with access to what is called lease financing, in which you do not take on the ownership of the asset, but instead lease it from the bank. You might ask, what is the benefit of using leasing? Well, it is beneficial in a situation where the asset depreciation is too high, and you rather not deal with the depreciation expense, or management of the asset. It also can help you with managing your cashflows with having the regular payments.